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September 2018

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Disclaimer: Prices and forecasts are subject to change at the discretion of Sproule.
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Sproule Price Forecast Sees Material Changes in September

Sproule has made material changes to the September 30, 2018 forecast from the August forecast.

Major changes to last month's forecast include:

Increases to Brent and WTI from $74 to $85 and $68 to $77 (USD/bbl), respectively.

Widened Canadian Light Sweet and Canadian Heavy differentials to WTI.

Decreases to Henry Hub and AECO.

Decreases in USD/CAD Exchange.

Global Crude Outlook

The crude oil market is experiencing pricing it hasn’t seen since late 2014 as it emerges from a deep industry downturn. Up to this point in the recovery, US shale and OPEC have been able to keep pace with growing global demand, but lost barrels from cancelled megaprojects, continued geopolitical disruptions, steep production declines, and slowing US supply growth will begin to lag supply behind our world’s growing appetite for oil.

Over the past year, crude markets have tightened significantly from 2015-2017 levels with Brent crude hovering around $85.00USD/bbl and WTI at $75.00USD/bbl. US light tight oil (LTO) production has been robust in 2018, adding an expected 1.3mmbbl/d of crude supply growth by end-2018. This growth, however, will begin to wane as decreasing per-well productivity rates and infrastructure bottlenecks restrict further expansion in the near term. In OPEC, Venezuela continues to experience significant production losses, as will Iran once US secondary sanctions against Iran’s oil exports are implemented on November 4. Since Saudi Arabia is currently producing only 0.2mmbbl/d below June 2016 levels (currently at 10.4mmbbl/d, June 2016 at 10.6mmbbl/d) Saudi Arabia is unlikely to have enough readily available spare capacity to make up the significant losses from Venezuela and Iran. Combining the tightening supply picture with global crude demand growth trending to 1.5mmbbl/d for 2018, we expect to see sustained Brent crude pricing around $84.00US/bbl in the short term. WTI will also receive pricing support, but infrastructure constraints getting crude to the Gulf Coast will keep the differential to Brent in the $7US/bbl range. Longer term, the impacts of slowing US supply growth and lost barrels from cancelled megaprojects will hold Brent pricing in the $80.00US/bbl range, with WTI prices settling around $77US/bbl by 2021 ($3.00US/bbl discount to Brent) as pipeline bottleneck issues are alleviated.

North of the 49th parallel, Canadian producers continue to see widened discounts caused by lack of pipeline capacity to export markets. In recent weeks, we have seen a blowout in Canadian crude differentials caused by the unexpected shutdown of BP’s Whiting refinery in Indiana, the largest consumer of Canadian crude oil out of all midwestern refineries. Whiting is expected to come back online before the end of October, and we anticipate WCS differentials to return to the $25US/bbl level before year-end. Longer-term, Sproule anticipates the three major pipeline projects currently contemplated (Keystone XL, Enbridge Line 3, Transmountain) to alleviate constraints by 2021-2022. In the meantime, producers will rely on rail to move their growing production. We have increased the WCS and CLS discounts to WTI to reflect the increased costs producers will be paying to transport their production to market over the next several years. We expect WTI-WCS differentials will level off in the $16.00US/bbl range, up from historical averages in the $13.00-$14.00US/bbl range, with a wider long-term differential due to the impact of IMO 2020.

Brent Crude

Sproule has increased our outlook for Brent crude to $80.00US/bbl long-term. Pricing will be supported by a continued tightening of the crude supply-demand balance.

Year

August 31, 2018 (USD/bbl)

September 30, 2018 (USD/bbl)

2018

74.00

84.00

2019

68.00

82.00

2020

72.00

81.00

2021

75.00

80.00

WTI Crude

Sproule has increased our outlook for WTI to $77.00US/bbl long-term. The Brent-WTI differential will tighten as pipeline infrastructure in the southern US continues to expand.

Year

August 31, 2018 (USD/bbl)

September 30, 2018 (USD/bbl)

2018

68.00

77.00

2019

65.00

75.00

2020

70.00

75.00

2021

73.00

77.00

WTI-WCS Differential

Short-term, WCS pricing will be depressed due to pipeline capacity shortages leaving Canada. Long-term, differentials will level to ~$16.00US/bbl, incorporating a $2.00-$3.00 impact from IMO 2020.

Year

August 31, 2018 (USD/bbl)

September 30, 2018 (USD/bbl)

2018

20.35

24.82

2019

17.16

21.00

2020

15.39

19.80

2021

15.44

16.29

2022

15.13

15.96

WTI-Canadian Light Sweet Differential

Short-term, CLS pricing will be depressed due to pipeline capacity shortages leaving Canada. Long-term, differentials will level to $3.00-$3.50 range as producers sign long-term firm commitments to rail, and pipeline capacity increases in Western Canada.

Year

August 31, 2018 (USD/bbl)

September 30, 2018 (USD/bbl)

2018

6.12

9.24

2019

5.20

7.50

2020

4.20

6.00

2021

3.65

3.85

2022

2.98

3.14

North American Natural Gas Outlook

On the gas side, we are less bullish. The US continues to produce record volumes of gas, primarily from the Appalachia shale gas region in the US Northeast, and significant associated gas from light tight oil plays.

The demand picture for gas in the US looks good, with increasing LNG export capacity, growing natural gas power generation, and strong exports to Mexico. In particular, the connection of North American gas to the global LNG market will create a more global market for gas, which will support greater alignment in global gas prices longer term. However, the record supply growth in the last year (10bcf/d YoY) more than meets this growing demand and will act as a ceiling on pricing, which we now think will be sustained over the forecast period. We have adjusted our long-term Henry Hub price accordingly, moving from $3.75US/mmbtu to $3.50US/mmbtu by 2021.

The healthy US supply picture means that Canadian producers have even more volumes to compete with in an already over-supplied market. Gas exports from Canada to the US have been declining over 2018 and we expect this trend to continue as the US is able to meet their own gas demand needs. Pricing at AECO, while much better than it was a year ago, will continue to feel downward pressure because of competitive pressures with gas-on-gas competition from the Marcellus/Utica and associated gas from the Permian in particular. Also, significant debottlenecking upstream of James River will be needed over the next couple of years before a semblance of stability returns to the Western Canadian gas market. The announcement of the LNG Canada project earlier this week will be a positive driver for future export options and pricing of Canadian gas, but it will not provide immediate relief to Canadian producers. To reflect these factors, Sproule is reducing our outlook at AECO from $3.12CAD/mmbtu to $2.82CAD/mmbtu long term.

Henry Hub Natural Gas

Sproule has revised our Henry Hub natural gas forecast down to $3.50US/Mmbtu long term. Continued robust supply from the Appalachia shale and from LTO associated gas will restrict pricing growth over the forecast period.

Year

August 31, 2018 (USD/mmbtu)

September 30, 2018 (USD/mmbtu)

2018

3.00

3.00

2019

3.25

3.00

2020

3.75

3.25

2021

3.83

3.50

Henry Hub-AECO Differential

Sproule has widened our AECO differential to Henry Hub to $1.00US/Mmbtu long term. Diminishing gas exports to the US combined with robust associated gas production in the WCSB will restrict pricing growth at AECO.

Year

August 31, 2018 (USD/mmbtu)

September 30, 2018 (USD/mmbtu)

2018

1.50

1.50

2019

1.20

1.30

2020

1.10

1.20

2021

1.00

1.10

2022

0.80

1.00

USD/CAD Exchange Rate

Sproule has pushed out the USD/CAD recovery to 0.85 by 1 year, from 2020 to 2021.